The impact of an employer's liquidation and/or estate sequestration on the employment relationship with the employee, with a view to business rescue as possible alternative

The liquidation/sequestration of employers, along with the subsequent job losses, has far-reaching consequences. It not only deprives employees and their dependants of their means of support, but also affects the productivity and thus economic prosperity of the region and country. Should a viable and lawful alternative exist, it would therefore make sense to explore it.
Up until the late 1990s, South Africa had been characterised by a liquidation culture. Companies in financial distress used to be either subjected to takeover or settlement, or liquidated in terms of the provisions of the previous Companies Act 61 of 1973. However, most industrialised countries have since started trying to save failing companies instead of liquidating them. This approach, known as business rescue, has now also been included in the new South African Companies Act 71 of 2008.
This article first explores employees' rights upon the liquidation/sequestration of their employers, as currently contained in the Labour Relations Act 66 of 1995 and the Insolvency Act 24 of 1936. The former stipulates two options, namely either retrenchment in terms of section 189 and 189A, or transferring a business as a going concern in terms of section 197A. Retrenchment entails reducing the number of employees, either when the employer is no longer able to afford his entire staff establishment or when there is no longer enough work for all employees. Recent experience in South Africa has shown that companies seem to be willing to pay ever higher amounts in retrenchment packages, which eventually renders them vulnerable to increased financial pressures. The second option, the transfer of a business as a going concern, is aimed at protecting job opportunities. The new employer to whom the business is transferred is obligated to offer the employees essentially the same conditions of service as those that applied at the previous employer. Where employees' conditions of service are amended to such an extent that employees end up significantly worse off than before, employees may terminate the employment contract and seek relief on the grounds of constructive dismissal, which, if confirmed, will automatically constitute unfair dismissal. In turn, section 38 of the Insolvency Act currently also provides prescripts with regard to the termination of employment contracts based on the employer's operational requirements in solvent circumstances.